Taxing mileage

Over at the NYT Green Inc. blog, Kate Galbraith asks whether mileage taxes will replace gas taxes. The post is interesting and it has some arguments for and against. But it misses what economists would probably consider the main point: the taxes should be used to reduce the externalities associated with driving. In other words, rather than forcing society to bear the cost of extra pollution, congestion, oil dependence, etc., we should use taxes to force drivers to pay the dollar-equivalent of those costs. In response to the taxes, drivers will their behavior so that we get the socially optimal level of driving/fuel use (and the socially optimal level of pollution, congestion, etc.).

The next question then is whether the externalities associated with driving are more correlated with fuel use, or mileage. And it turns out the mileage-related externalities are much larger. Consider this paper, which estimates that mileage-related externalities are an order of magnitude larger (see Table 2 on page 36). Even if you would quibble with the specific numbers, the general direction is clear: mileage taxes would more directly address the major causes of external social costs from automobile use. And as an added bonus, the types of systems used to assess mileage taxes could be easily used to impose congestion-specific fees — a major benefit, since congestion is the single largest externality associated with automobile travel.

3 Responses to “Taxing mileage”

But the Parry, et al. estimates in Table 2 assume a fuel economy of 21 mpg. Perhaps a reasonable average in 2006, but doesn’t account for the differences in externalities between, say, a Prius and a Hummer. So while we could apply the same per-mile tax on the Prius and the Hummer, it probably isn’t quite getting the incentives right.

Just because total external costs are correlated with total vehicle miles traveled doesn’t mean that charging everyone their VMT share of total external costs would get the right result.

Daniel Hallsaid

Mike, you are quite right. In fact if you go and read the original post at Green Inc. you will see that Oregon officials explicitly mention accounting for this by charging different VMT rates for different vehicle types. (I didn’t want to overburden the post with details.)

But also please note that to the degree that average (or median) fuel efficiency is higher than 21 mpg, then externalities will be even MORE strongly correlated with VMT. While a vehicle with 21 mpg has mileage-related externalities that are 10 times higher than fuel-related externalities, a 50 mpg car will have mileage-related externalities that are about THIRTY times higher.

The idea that per-mile or per-gallon taxes can be used to make drivers “pay” the social costs of driving is absurd. How about we tax your shopping cart to make you pay the social cost of feedlot beef? Or tax your home’s footprint to make you pay the social cost of the energy you consume?

We have the technology to control congestion through congestion pricing. Taxing mileage or gasoline won’t do it. We have the technology to measure pollution outputs and tax actual pollution. Taxing mileage or gasoline won’t do it. Taxing the so-called social costs directly will get people to reduce those social costs to avoid the taxes. Since the amount of driving we do is not proportional to the amount of pollution or congestion our cars generate, taxing driving will not yield the right result.